How Much Is a TV Star
Really Worth?
With the amazing success of shows like American Idol, Survivor, and The Apprentice,
reality television has become an integral part of the television landscape. Since
its inception, there has been an ongoing debate on the relative merits of
reality programming vs. traditional programming. Most of this debate focuses on
the
Game Theory
Game theory provides us with a useful way of looking at business strategy. While many people think that game theory about determining the winners or losers of a “game,” it is actually about how to abstractly model business situations. Game theory takes into account the actions of all of the participants (or “players”). As in real life, the actions and reactions of others are important in determining the correct strategy. While game theory models are abstract, they often provide interesting insights into real business situations. Reducing a business situation to an appropriate game can help in developing the right strategy.
An important concept in game theory
is added value.[3]
This concept is relevant to the two fundamental elements of business:
generating value and determining how that value is distributed. These two
processes require somewhat contradictory strategies. In order to generate the
most value, a company must work closely with suppliers,
The definition of a player’s added value is: “the total value created with the player in the game, minus total value created without it in the game.” The most interesting thing about this concept is that the player’s added value is determined by the other players in the game. What the player receives is equivalent to how much the others will lose if it exits the game.
For example, let's look at the Harry Potter movies. In the first movie, Harry, played by unknown actor Daniel Radcliffe, was paid $125,000.[5] This made sense because he could be substituted for any other unknown child actor -- it wouldn't matter if he left the game. After the success of the first movie, Radcliffe’s added value increased substantially. Keeping Harry Potter the same would be a significant draw to audiences. This meant that the studio had to pay him for that benefit. In 2003 Radcliffe made about $3 million (£1.75m) from Harry Potter and the Prisoner of Azkaban,[6] far more than he made from his first movie. This brings up an obvious question, “Why didn't the studio write him into a long-term contract?” The studio did. However, it is common for actors to renegotiate contracts once their added value increases. Many actors will call in sick or refuse to work until their contracts are changed.[7]
Television Actors and
Added Value
Actors on television can have tremendous added value that can sometimes equal or exceed the entire profits of the show. In their last two seasons, the cast of Friends were so valuable that they were each paid over $1 million per episode. After a television program stays on the air for a few years, the cast becomes an integral part of the show. Common wisdom says that these actors cannot be fired. “It's never in anyone's best interest to lose a key element of a [hit] show,” says Brad Grey, a top television agent.[8]
In line with this common wisdom, we
can determine just how much added value television actors have. It’s simply the amount of value all
the players (the network, advertisers, etc.) would lose if that actor left. Rob Lowe should have realized this when he
renegotiated his salary for The West Wing
in 2002. Lowe tried to negotiate his salary, to be on par with Martin Sheen,
who plays the President. As Steven Stark, a Boston-based television historian explained
at the time, “The show won't even blink [when Lowe leaves]. Rob Lowe is one of
about seven or eight strong characters. He's an important character. But the
reality is, if you're doing a show about The
West Wing and you're not the president, you're not the star. You're one
among equals. It's the nature of the show.”[9]
The nature of the show is exactly what determines everyone's added values -- it's the rules of the game. The network gets to define the rules while also being a participant. Therefore, it should create shows with a view to everyone’s added value! Shows like the West Wing allow the networks to reap profits by preventing the actors from getting too much added value. But on shows like Friends and Frasier the stars have tremendous added value because they become the centerpiece of the show. Friends cost the network $10 million an episode (each star made $1 million) and barely made a profit last year. Frasier cost $5.2 million (Grammer made about $2 million) an episode and lost the network about $50 million.[10]
James Surowiecki of The New Yorker did an interesting analysis of how networks can reduce the added value of stars.[11] Surowiecki profiled Dick Wolf, the producer of Law and Order and its spin-offs CSI, CSI: Miami, and Law and Order: Criminal Intent, which are all regularly in the top 20 in the Nielsen’s ratings. Wolf's philosophy is that actors are not as important as most people think. He believes that people tune in to see shows and not actors. Once, he even sent a greeting card to network executives that said, “It's the writing stupid.” This strategy has been borne out in practice. On Law and Order there have been 18 different leads in the show's 14 year-run without affecting its popularity. By building the brand of the show and preventing actors from acquiring too much added value, these shows cost less than a third of what Friends costs and therefore allow the networks to reap higher profits. Since most television shows sell advertising based on the number of viewers, two shows with similar ratings, such as CSI and Friends should bring in similar revenues.
So why don't more people do what Dick Wolf does and make the format the centerpiece of the show rather than the actors? They have! This is the basis of reality television. The added value of each person on a reality show is tiny. Even in a show like Survivor All-Stars, it's hard to imagine any of the contestants having enough added value to negotiate enormous salaries.
Reality shows make sense because the essential goals of actors on traditional shows differ greatly from the contestants on game shows. Actors hope to join a show that will become so successful, they will become huge stars and receive huge salaries. Contestants on reality shows tend to have smaller ambitions. They hope to become celebrities or start an acting career. While some contestants on reality programs make lots of money after the show, they are not paid by the show and therefore do not affect its profitability. The next year, a popular reality show will retain its high ratings without having to pay its cast any more money.
Is Reality TV Really
the Answer?
Even though reality programming seems to offer better economics than traditional programming, other players can still capture large amounts of value. For example, reality shows have recently hired celebrities in shows like The Simple Life and The Apprentice. If celebrities become important parts of the show, these shows may run into the same problems of excessive salaries that other shows have. NBC paid real estate billionaire Donald Trump $50,000 an episode in the first season. In an interview with the Wall Street Journal, Trump started to calculate his value to NBC. Since his show was as popular as Friends he should make as much as the cast of that show ($1.5 million * 6 = $9 million) and since his show was on for a full hour, that should bump him up to $18 million. “That seemed fair,” he says in an interview. “I'm not being totally facetious.”[12]
Another group has started to capture the value in reality shows. Many networks are demanding proven track records and are willing to pay for them. One person who has profited greatly from this is producer Mark Burnett. Burnett created some of the highest rated reality shows like Survivor and The Apprentice. Four networks bid on his newest show The Contender, with NBC winning it for over $2 million an episode, a reality show record.[13]
Overall, we can see that reality television doesn’t automatically mean higher profits to the networks. Today, networks are making large profits on highly rated reality shows but only time will tell if those profits will evaporate. It is clear, however, that since networks can affect the types of shows that they produce, it would advantage them to search for and create the types of shows where they can best manage the added values of the other players.
[1]
[2] With guidance
from Professor
[3] For a discussion, see “Value-based Business Strategy,” by Adam Brandenburger and Harborne Stuart, Journal of Economics & Management Strategy, 5, 1996, 5-24.
[4] Adam Brandenburger and Barry Nalebuff, Co-opetition, Doubleday 1996, p.viii.
[5] Stephen Schaefer, “Stars will profit little from magic of 'Harry Potter,'” The Boston Herald Nov. 15, 2001: 69.
[6] Maurice
Chittenden, “Harry Potter makes JK Rowling richest author ever,” Sunday
Times
[7] Co-opetition, p.270.
[8] Bill
Carter, “Good Sitcom Is Rare, And Actors Know It,”
[9] Suzanne C.
Ryan, “Lowe, Wanting Presidential Treatment, Quits,” The
[10] Paige
Albiniak, “Quit Crying, Friends,” Broadcasting & Cable
[11] James Surowiecki, “TV on the cheap,” The New Yorker Mar 4, 2002: 33. <http://www.newyorker.com/talk/content/?020304ta_talk_surowiecki>
[12] Brooks
Barnes, “Reality Checks: Unscripted Shows Become a Money Pit,” The Wall Street Journal
[13] Ibid.